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The Labour Market Effects of Payroll Taxes in a Middle-Income Country: Evidence from Colombia

  • Kugler, Adriana D.
  • Kugler, Maurice

We use a panel of manufacturing plants from Colombia to analyse how the rise in payroll tax rates over the 1980s and 1990s affected the labour market. Our estimates indicate that formal wages fall by between 1.4% and 2.3% as a result of a 10% rise in payroll taxes. This ‘less-than-full-shifting’ is likely to be the result of weak linkages between benefits and taxes and the presence of downward wage rigidities induced by a binding minimum wage in Colombia. Because the costs of taxation are only partly shifted from employers to employees, employment should also fall. Our results indicate that a 10% increase in payroll taxes lowered formal employment by between 4% and 5%. In addition, we find less shifting and larger disemployment effects for production than non-production workers. These results suggest that policies aimed at boosting the relative demand of low-skill workers by reducing social security taxes on those with low earnings may be effective in a country like Colombia, especially if tax cuts are targeted to indirect benefits.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4046.

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Date of creation: Sep 2003
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Handle: RePEc:cpr:ceprdp:4046
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  1. Kevin Lang, 2003. "The Effect of the Payroll Tax on Earnings: A Test of Competing Models of Wage Determination," NBER Working Papers 9537, National Bureau of Economic Research, Inc.
  2. Bateman,Hazel & Kingston,Geoffrey & Piggott,John, 2001. "Forced Saving," Cambridge Books, Cambridge University Press, number 9780521484718.
    • Bateman,Hazel & Kingston,Geoffrey & Piggott,John, 2001. "Forced Saving," Cambridge Books, Cambridge University Press, number 9780521481625.
  3. Fajnzylber, Pablo & Maloney, William F., 2000. "Labor demand andtrade reform in Latin America," Policy Research Working Paper Series 2491, The World Bank.
  4. Adriana Kugler, 1999. "The Impact of Firing Costs on Turnover and Unemployment: Evidence from the Colombian Labour Market Reform," International Tax and Public Finance, Springer, vol. 6(3), pages 389-410, August.
  5. Vroman, Wayne, 1974. "Employer Payroll Tax Incidence: Empirical Tests with Cross-Country Data," Public Finance = Finances publiques, , vol. 29(2), pages 184-200.
  6. Robert J. Gordon, 1972. "Wage-Price Controls and the Shifting Phillips Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 3(2), pages 385-430.
  7. Nickell, Stephen & Layard, Richard, 1999. "Labor market institutions and economic performance," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 46, pages 3029-3084 Elsevier.
  8. Beach, Charles M & Balfour, Frederick S, 1983. "Estimated Payroll Tax Incidence and Aggregate Demand for Labour in the United Kingdom," Economica, London School of Economics and Political Science, vol. 50(197), pages 35-48, February.
  9. Joshua D. Angrist, 1995. "Short-Run Demand for Palestinian Labor," Working papers 95-16, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Adriana Kugler & Juan F. Jimeno & Virginia Hernanz, 2002. "Employment consequences of restrictive permanent contracts: Evidence from Spanish labor market reforms," Economics Working Papers 651, Department of Economics and Business, Universitat Pompeu Fabra.
  11. Kugler, Maurice & Rosenthal, Howard, 2000. "Checks and balances: an assessment of the institutional separation of political powers in Colombia," Discussion Paper Series In Economics And Econometrics 0018, Economics Division, School of Social Sciences, University of Southampton.
  12. Jonathan Gruber & Alan B. Krueger, 1991. "The Incidence of Mandated Employer-Provided Insurance: Lessons from Workers' Compensation Insurance," NBER Chapters, in: Tax Policy and the Economy, Volume 5, pages 111-144 National Bureau of Economic Research, Inc.
  13. Gruber, Jonathan, 1997. "The Incidence of Payroll Taxation: Evidence from Chile," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages S72-101, July.
  14. Holmlund, Bertil, 1983. "Payroll Taxes and Wage Inflation: The Swedish Experiences," Working Paper Series 68, Research Institute of Industrial Economics.
  15. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  16. Tullio, Giuseppe, 1987. "Long run implications of the increase in taxation and public debt for employment and economic growth in Europe," European Economic Review, Elsevier, vol. 31(3), pages 741-774, April.
  17. B Bell & Stephen Nickell, 1996. "Would Cutting Payroll Taxes on the Unskilled Have a Significant Effect on Unemployment?," CEP Discussion Papers dp0276, Centre for Economic Performance, LSE.
  18. repec:fda:fdaddt:2003-14 is not listed on IDEAS
  19. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, vol. 84(3), pages 622-41, June.
  20. Andalón, Mabel & Pagés, Carmen, 2008. "Minimum Wages in Kenya," IZA Discussion Papers 3390, Institute for the Study of Labor (IZA).
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